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Area Contract (Net Cost)
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Area Contract: Net Cost
When an authority issues a contract to a bus operator giving him the exclusive right to operate bus services in an area that forms all or a substantial part of a city, it’s described as an area contract.

Normally these contracts are awarded on the basis of competitive tenders. During a transition period, however, negotiated area-contracts may be awarded on the basis of negotiation with an incumbent bus operator.bus image

Under a net-cost contract the operator provides a specified service for a specified period and retains all revenue. The authority pays a subsidy to the operator if the bus services in an area are unprofitable. If the services are profitable, the authority pays the operator a royalty. Under a net-cost contract the operator has to forecast both his costs and his revenues.

An area contract will be appropriate if:

  • The city has a number of relatively self-contained areas. (If the total number of buses in the city is fewer than 500 then there should be only one citywide area.)
  • The authority wishes the operator to undertake bus service planning for the area (normally this would be subject to approval by the authority).
  • The authority wishes the operator to establish himself and be identified as the bus system provider for the area.
A net-cost contract will be appropriate if:
  • The authority wishes to give an incentive to the operator to increase ridership and revenue.
  • The authority wishes to give the operator some flexibility to amend routes and schedules to make the network as attractive and efficient as possible.
  • A small percentage of revenue is collected off-bus.
  • Sharing off-bus revenue is not seen as a problem.
  • The authority wishes to fix the absolute amount of subsidy.
The major disadvantages of a net-cost area contract are:
  • There is a possibility of encouraging on-street competition for passengers on streets where more than one company operates.
  • Sometimes it’s difficult to decide which operator should operate routes that cross two or more areas.
  • The authority may have to pay more for a net-cost rather than a gross-cost contract since the operator usually makes very conservative estimates of revenue to reduce his financial risk
  • The authority’s ability to make essential changess to the network are restricted if they adversely affect the revenue of pre-existing net-cost contracts.
  • Since the number of buses involved is relatively large, the number of bidders is likely to be small.
  • It’s difficult to replace a poorly performing operator since a large fleet of buses is involved.


System design for a net-cost area contract must take into account:
Legal and regulatory framework
Institutional requirements
Financial aspects
Vehicle types
Infrastructure requirements
Making the transition



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